In the drive for greater transparency in financial reporting, the Public Company Accounting Oversight Board (PCAOB) has issued a proposal to enhance audit reports by identifying and reporting on critical audit issues as part of a company's audit. An article in the Journal of Accountancy identifies four key areas of focus for the proposed standards:
- A statement of auditor independence. This would explain that the auditor is a public accounting firm registered with the PCAOB and is required to be independent with respect to the company.
- Tenure disclosure. The audit firm would disclose the year it began serving as a company’s auditor.
- Other information explanation. The auditor would be required to describe the procedures and evaluation the firm performed on other types of information included in the annual report outside the financial statements.
- Language enhancements. These would change existing language in the auditor’s report related to the auditor’s responsibilities for fraud and notes to the financial statements.
A key component of the proposal would be the requirement to identify and report on critical audit matters, which are defined as matters addressed during the audit that:
- Involved the most difficult, subjective, or complex auditor judgments;
- Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or
- Posed the most difficulty to the auditor in forming an opinion on the financial statements.
When critical audit matters are determined, auditors would be required in their report to:
- Identify the critical audit matter.
- Describe the considerations or reasons that the matter was identified as critical.
- Refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter, when applicable.
Among the other requirements, auditors would be required to evaluate the company's 10-K filing and review selected financial data as well as the Management Discussion & Analysis.